Scarcity Fallacy

As an absolute concept, economic scarcity of a resource implies only that it is not available in limitless supply. Nevertheless, if no person demands it, the resource has no value. A scarce resource under demand becomes property. No degree of difficulty in producing the resource is implied.

Scarcity may also refer to the relative availabity of some property. For a given supply, greater demand implies greater availability. However, increasing demand tends to increase supply, and thereby availability. Similarly, for a given demand, increasing supply tends to decrease demand, and thereby availability. These negative feedbacks stabalize availability and correspondingly price.

A single coin has fixed supply. There is a theory that the fixed supply of Bitcoin is the source of its value. As with Bitcoin, there is a fixed supply of the Mona Lisa, only one is possible. The theory implies that this is the source of demand for the famed work of art. However there are countless unique works of art with no demand, and therefore no value.

Demand is not a necessary consequence of fixed supply, and therefore the theory is invalid. Bitcoin cannot be valuable only because it is scarce, though it necessarily becomes more scarce the more highly it is valued. It can only be valued because of its utility in some scenario.

A related theory is that Bitcoin’s fixed supply is its source of utility because this ensures decreasing availability, and thereby price, given increasing demand.

Bitcoin is unique in the realm of property in that the cost of transferring it inherently increases with demand to do so. It is also, unlike the Mona Lisa, subject to effective substitution. These forces necessarily create the negative demand feedback seen in property without fixed supply. Given that demand determines availability, and no level of demand is assured, it cannot be assumed that fixed supply is a source of utility, invalidating the secondary theory.